Under the proposed Senate health-care bill, spending on Medicaid will increase from $415 billion today to $624 billion in 2026, according to the CBO report. This may be surprising, since the law is generally billed as cutting Medicaid. And, in fact, the law does cut Medicaid, reducing the amount of federal matching funds available and decreasing Medicaid eligibility. Moreover, the CBO report also projects that the Senate bill will reduce “federal outlays for Medicaid” by $772 billion over the next ten years. What is going on?
The answer to this puzzle is that Medicaid spending is out of control and will increase a great deal no matter what happens. The Senate bill would make the program considerably slimmer than it is now, cutting it from the perspective of any given recipient, but will still allow the cost of the program, in constant dollars, to increase by 50 percent over the next decade., as the program grows and the eligible population ages. So the Senate bill would, in a sense, cut Medicaid, but it is a much-needed sort of “cut.” Nor is it a particularly radical cut — in fact, it would take place along broadly the same lines that have been envisioned by centrist Democrats for two decades now.
There are two major reforms to Medicaid in the Senate proposal. It would lower the federal matching rate for the Medicaid-expansion population (those people who were added to Medicaid by states that accepted Obamacare’s invitation to expand their programs), so Medicaid-expansion states would receive less federal revenue than they currently do (although still a fair bit); and it would institute per capita spending caps indexed to inflation, so that states could receive matching funds only up to a certain limit.
Per capita spending caps, which constitute the bulk of the Medicaid reform, are not new. Indeed, for two years, between 1995 and 1997, the Clinton administration and congressional Democrats advocated spending caps in the face of GOP resistance. The motivation for cutting costs was clear at the time: between 1985 and 1995, federal Medicaid spending had increased by an average of 15 percent a year. One major culprit was the unlimited structure of Medicaid matching grants, which ensured that states would continue to receive matching funds from the federal government no matter how much they spent. After Republicans took back the House in 1994, they took aim at this open-ended system, proposing that Medicaid be converted into block grants. Under the original legislation establishing Medicaid, certain low-income households are entitled to the insurance; the proposal would have repealed this provision and instead made states eligible for grants of money, tied to inflation, that they could spend as they chose under loose guidelines.
This was anathema to the Clinton administration, which argued instead for per capita spending caps. These would continue the guarantee of coverage for the eligible population but would cap increases in state spending to the rate of inflation, much as the current Senate proposal does, and the House proposal before it. Democrats greatly preferred this, since it ensured that states could not seriously cut coverage to eligible individuals, and since it allowed for the program to grow as enrollment grew, while block grants would only tie federal funds to inflation. As a fascinating Mercatus report, written by Doug Badger, chronicles, the dispute between block grants and per capita spending caps occupied much of the following two years: Democratic congressmen would routinely propose amendments converting block grants to spending caps and would routinely be voted down, while the compromise budgets that Clinton proposed invariably included spending caps. In the summer of 1996, the budget dispute finally ended, with the compromise measure preserving the Medicaid entitlement entirely. Thus ended the debate between spending caps and block grants.
Except that, as it turned out, Clinton had gone native. Democrats had proposed spending caps as a negotiating stance to avoid block grants, a way for the federal government to plausibly rein in expenditures while preserving the individual entitlement. But Clinton thought differently: In his January 1997 budget, with the budget impasse resolved and thus no need for negotiating ploys, he yet again proposed per capita caps on Medicaid. This was a serious proposal from the Clinton camp, serious enough that the administration prepared talking points to combat opposition from governors on the left (“I know more than most, that our goal in achieving constraints in Medicaid cannot be realized without providing you much greater flexibility to administer your programs”). The talking points weren’t enough. Governors, both Democratic and Republican, were horrified that they would no longer have access to practically unlimited matching funds. The spending caps were nowhere to be found in the budget bill that eventually passed.
Democrats would routinely propose amendments converting block grants to spending caps and be voted down; the compromise budgets that Clinton proposed invariably included spending caps.
The per capita proposal briefly resurfaced 15 years later, when the Romney-Ryan campaign proposed a Medicaid block-grant plan. As if on cue, Tom Daschle resurrected the 1990s center-left response, telling Inside Health Policy that he was “vehemently opposed” to block grants but considered them distinct from per capita caps, since per capita caps allowed states to enroll more residents if their low-income population increased. Republicans signaled that they would be open to per capita caps as a compromise, but nothing came of it.
However urgent Medicaid reform was in 1997 or 2008, it is yet more urgent today. In 1997 Medicaid spending, adjusted for inflation, was about 1 percent of GDP; it’s 2.4 percent now and projected to rise under current laws to 3.2 percent in 2047. If the rise in costs were not enough by itself, wealthy states have increasingly begun to game the open-ended system of matching funds: New York spends almost as much on Medicaid as California does, even though California has twice as many people. As federalists have pointed out, an unlimited system of matching funds allows wealthier states, which can spend more on domestic services, to obtain even more matching funds so that federal resources are directed to the places that need it least. These are problems that could be fixed with a per capita spending cap.
But whatever spirit of compromise was present in the 1990s is gone now. As the bitter debate over the Senate bill suggests, there is little appetite among Democratic congressmen for the centrist compromises that defined the Clinton years. Moreover, Democratic governors in states such as Connecticut and New York now have far more to lose from a more egalitarian model of Medicaid than they did in 1997, since they began to aggressively pursue federal funds in the late 1990s and early 2000s. No one today seriously suggests that the Democrats should accept per capita caps. Thus, a center-left policy has become center-right. And no one seems to remember what it used to be.